DiamondRock Hospitality Company (DRH) Q2 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Second Quarter 2013 DiamondRock Hospitality Company Earnings Conference Call. My name is Tawanda, and I will be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Mark Brugger, Chief Executive Officer. Please proceed, sir.

Thanks, Tawanda. Good morning, everyone, and welcome to DiamondRock's Second Quarter 2013 Earnings Conference Call. Today, I am joined by Sean Mahoney, our Chief Financial Officer; and Rob Tanenbaum, our Chief Operating Officer. As usual, before we begin, I would like to remind everyone that many of our comments today are not historical facts and are considered forward-looking statements under federal securities law. They may not be updated in the future. These statements are subject to risks and uncertainties as described in our SEC filings. Moreover, as we discuss certain non-GAAP financial measures, it may be helpful to review the reconciliation to GAAP set forth in our earnings press release. Let me start the call today by stating what is already apparent in the industry data. The favorable trends in lodging fundamentals continued in the second quarter. Demand was very solid, increasing over 2%. Demand helped push industry RevPAR up a healthy 5%, with the majority of the increase coming from favorable rate expansion. At the same time, new hotel supply remain muted, with less than 1% growth in the quarter. While there are some macro challenges ahead, such as continued sequestration, the major corollaries for lodging demand growth are all positive. In particular, there are encouraging trends in employment, consumer sentiment and corporate investment. Based on this data, as well as constrained supply, we believe that attractive lodging fundamentals will persist, not only for the rest of 2013, but more than likely for the next several years. At DiamondRock, we continued to execute on our overall game plan for this cycle. As you know, we were aggressive in buying early in the cycle, with a focus on gateway markets and value-add opportunities. Simultaneously, we upgraded our portfolio by selling slower growth, non-core assets. In 2013, the company's focus is on unleashing those value-add opportunities within the portfolio. We intend to accomplish this through a combination of major capital initiatives to upgrade the hotels and asset management best practices. On that last point, Rob Tanenbaum, our recently appointed COO, has made great progress implementing his playbook for asset management best practices, in order to maximize the potential from the portfolio. We believe that our strategy is setting DiamondRock up as a compelling multiyear growth story. In the second quarter, the portfolio delivered solid results with many of our hotels gaining market share as our asset management initiatives began to gain traction. Our hotels outperformed in several important markets, including: San Diego, Washington, D.C., Boston, Denver, and Chicago. Excluding hotels under renovation, the portfolio achieved an occupancy level of 81.4%, which is a second quarter record for DiamondRock. Moreover, in the second quarter, the portfolio, again, excluding the 3 hotels under renovation, turned in an impressive RevPAR growth of 6.7% and EBITDA profit margin expansion of 130 basis points. These results exceeded our expectations. While we anticipate the strength in the transient segments, the group's strength in the quarter surprised to the upside. Importantly, multiple segments performed well and positive mix shift among segments occurred in the quarter. Excluding the hotels under renovation, business transient revenue increased over 11%, and second quarter group revenues grew approximately 15%, which was led by outperformance at the Westin Boston and the Chicago Marriott. To give you a sense of group strength, we sold close to 33,000 more group room nights in this second quarter. Moreover, in the quarter -- for the quarter pickup, was up 46%, 46% higher than last year. Already, we have about 92% of our forecasted group business under contract for the balance of this year. Although the city-wide calendars are more difficult, there are markets for the second half of the year. And the 2014 group story is shaping up quite well. In the second quarter, we picked up $12.6 million of group bookings for 2014. The pace for next year is up 9.5%. Importantly, we are also seeing strength in the group rate. When we reported last quarter, group rate for 2014 was up only 1.9%, and it is now up 5.4%. So we are starting to take advantage of pricing power as convention calendars gets more favorable in key markets like Boston. Clearly, our portfolio concentration is helping us outpace national trends on the group segment. While Sean will get it into more detail in a moment, I wanted to briefly address our $140 million renovation program. Overall, we remain extremely excited about the upside in this program, and we are pleased with our progress to date. The program includes transformational renovations of the Lexington Hotel and our 2 recently acquired Westins in Washington, D.C. and San Diego. Additionally, the program includes upgrade renovations at other hotels that will enable them to gain market share. A prime example of that is the 2 Marriott Courtyards in Manhattan. We're happy to report that the Courtyard renovations are complete and look great. We believe the renovations have added value to the hotels, both because it will enable them to modestly gain share and because we were able to add 5 new guestrooms from previously non-revenue producing space. Moreover, there are already early signs of success. One very encouraging data point to consider is that the Courtyard Fifth Avenue's comparable RevPAR grew over 20% in June, the first full month after renovation. The Lexington Hotel in Midtown Manhattan made tremendous progress this quarter and represents the company's most dynamic growth catalyst for the next several years. The conversion to Marriott's Autograph Collection is scheduled to occur before the end of this month. The renovated product is already receiving tremendous feedback from current guests, who are willing to pay a $35 premium for renovated rooms. The reaction from corporate clients has also been encouraging, with more than 75 potential accounts touring the partially renovated hotel this summer. We recently signed up a variety of prime financial services companies for post conversion at solid rates. One last interesting stat on Lexington. While we have just been added to the Marriott reservation system, the initial rates for rooms booked through that system for this fall is over $285, that's a terrific start. Year-to-date, and not unexpectedly, we have incurred significant disruption as a result of the renovation at our 3 New York City hotels. Fortunately, most of this disruption from our renovation program will be done in about 2 months. As we look forward into 2014, we do not expect any of our planned renovations to be materially disruptive to the portfolio's performance. On acquisitions and dispositions, we believe that our cost of capital remains elevated as our stock is trading at a meaningful discount to net asset value. Accordingly, while we underwrite with a long-term view towards cost of capital, we remain extremely disciplined and it is unlikely that we will be active in acquisitions near-term until our stock price more appropriately reflects our estimate of net asset value. Accordingly, the company will remain focused on creating significant shareholder value by mining the multiple internal growth opportunities contained within the existing portfolio. On dispositions, we have been very active in repositioning the portfolio this cycle and solid preponderance of our slower growing, non-core hotels last year. We think our current portfolio and market concentration is generally right on strategy. With that said, we remain committed to constantly watching the markets and regularity reviewing our portfolio for select opportunities to monetize our few, slower growing non-core assets at attractive pricing. While we are currently looking at a few limited opportunities, we traditionally do not talk about these transactions until they are under firm contract. The proceeds from any such dispositions could be used to create value by either further de-levering our conservative balance sheet, repurchasing stock under the share repurchase program we announced today or funding next year's acquisition of the new select-service Hilton in Times Square. Let me provide you with a brief update on that deal. Our development deal in Times Square is proceeding on schedule to be delivered mid-2014. We think we have already created value for our shareholders with this deal, as the hotel appears to have appreciated quite a bit from the $450,000 per key price that we locked in by contract over 2 years ago. The hotel will be a great addition to the portfolio. Now I'll turn the call over to Sean to provide additional details on our operating results, capital expenditure program and balance sheet. Sean?

Thanks, Mark. Before discussing our second quarter results, I want to remind everybody that the quarterly comparisons for our Marriott managed hotels are impacted by Marriott International calendar year conversion. Second quarter results for our Marriott hotels includes 7 more days than the 2012 second quarter. Please note that this will only impact our quarterly comparisons and will not impact full-year comparisons since, as a REIT, we have always reported annual results on a calendar year. Now let's turn to the second quarter numbers. The quarter reflected some exceptionally strong results at a number of our hotels, with 11 of our 27 hotels reporting double-digit RevPAR growth. Excluding the 3 New York City hotels under renovation, our portfolio generated RevPAR growth at an impressive rate of 6.7%, and drove strong margin expansion with hotel adjusted EBITDA margin increasing 130 basis points. As expected, the 3 hotels under renovation in New York City impacted overall results. For all 27 hotels, total revenues increased 6.4% while RevPAR was flat for the quarter. Our New York renovations reduced RevPAR growth by 650 basic points, as there were 31,000 room nights out of service. We are proud of our team's ability to partner with our hotel management teams to control cost during the quarter and limit the adjusted EBITDA margin decline to approximately 100 basis points. Overall, the quarter met our expectations as hotel adjusted EBITDA increased to $66.3 million and corporate adjusted EBITDA totaled $62.4 million. Now let me spend a few minutes discussing our hotel operating results in more detail. We were particularly pleased with another strong quarter of food and beverage performance. Our F&B revenues increased over 12%, contributing to 116 basis point improvement in F&B profit margins. In particular, our second quarter banquet revenues increased over 11%, which was driven by 16% growth at the Boston Westin, 94% at the Vail Marriott, and 34% at the Salt Lake City Marriott. In addition, Frenchman's Reef had strong banquet revenue growth of over 26%. The Salt Lake City Marriott continued to outperform, with close to 23% RevPAR growth and over 800 basis points of hotel adjusted EBITDA margin expansion. The hotel continued to benefit from incremental demand generated from the multibillion-dollar City Creek mixed-use development, as well as strong bookings at the Salt Palace located just across the street. This hotel continues to be a great success story for the company. The New York City market continued to surprise to the upside, with strong demand growth outpacing new supply. The Hilton Garden Inn Chelsea, our only New York hotel not under renovation, delivered outstanding RevPAR growth of close to 15%. Chicago was another bright spot for the company in the second quarter. Both the Chicago Marriott and the Chicago Conrad generated almost 12% RevPAR growth during the quarter. These hotels benefited from another quarter of strong group rooms production, with group revenues up close to 22% at the Chicago Marriott, and over 40% at the Chicago Conrad. Please note that the quarter was negatively impacted by the recent increase in the local property tax rates, which impacted quarter hotel adjusted EBITDA by approximately $1.1 million, and had an approximately 50 basis point impact on margins. Denver was another outstanding market during the second quarter. The JW Marriott Cherry Creek grew second quarter RevPAR over 12% and the Courtyard Denver increased RevPAR by 10%. The Denver market benefited from strong city-wide activity during the quarter, with 6 city-wides of 4,000 rooms or greater. The JW Marriott benefited from its superb location within Denver's high-end Cherry Creek neighborhood. The hotel also took advantage of robust demand in downtown Denver during the quarter, resulting in a greater than 18% increase in business transient revenue. Additionally, the Courtyard Denver benefited from the city-wide compression and increased group and transient rates over 23% and 9%, respectively. In addition, the recent renovation boosted the Alpharetta Marriott's outperformance during the quarter, allowing it to generate 26% RevPAR growth. Last, but not least, our resorts continued their outperformance this year with a terrific second quarter, which was led by The Lodge at Sonoma's 16% RevPAR growth. Sonoma drove transient production from the strength of the San Francisco market, and picked up additional weekday corporate groups from the Bay Area. The Vail Marriott also outperformed in the quarter, with RevPAR increasing over 11%. Vail benefited from good snowfall in April, as well as increased group demand throughout the quarter. We made significant strides on our capital expenditure program during the quarter. We still expect to invest approximately $140 million in the portfolio in 2013 projects, some of which will be completed in early 2014. We expect to fund the capital projects as follows: $55 million from existing cash reserves, which are classified as restricted cash on our balance sheet; and the remaining balance from corporate cash, split almost evenly from hotel cash flow and excess cash flow -- cash proceeds from recent financings. We continue to believe that the successful execution of our 2013 capital plans will be a major catalyst for earnings growth in 2014 and beyond. We manage our portfolio for long-term success and we are confident in our ability to deliver outperformance by making the right capital investment into our hotels to deliver multiple years of above-market growth. With that introduction, I want to discuss the current status of our most significant projects. The Lexington Hotel in New York remains our most exciting renovation project because of the transformational nature of the renovation and up-branding to Marriott's Autograph Collection. We have made great progress on the renovations since our last call. Some of our significant accomplishments during the quarter include, we are in the process of creating 15 new guestrooms at the hotel. These additional keys are the result of splitting several underutilized junior suites into 2 separate rooms, and converting an underutilized lounge into 2 rooms. The public space renovation is substantially complete. The lobby, meeting rooms and bar are all finished. The guestroom renovation is progressing. Renovation work is a complete or is underway on all 28 floors, as renovation on the last floor began this week. As of today, we have 365 renovated rooms back in service. These renovated rooms are continuing to command a pre-conversion rate premium of $35. The Autograph conversion is expected to occur later this month and the hotel recently entered Marriott's reservation system. The average rate for future bookings is $285, and we are very pleased with the preliminary results. I want to spend a minute discussing the 15 new keys. The incremental cost of these new keys is approximately $1 million or less than $70,000 per room. We estimate that the additional keys, net of construction cost, will add approximately $8 million to the hotel's value. Including the $1 million cost of the new keys, we currently expect the renovation to cost $46 million. Marriott will provide over $4 million of key money to the company later this year, that we will use to offset the cost of the renovation. After renovation and re-branding the Marriott's Autograph Collection, we expect to realize significant rate gains with the hotel generating adjusted EBITDA in the low $20 million range during 2014, and ramping to north of $30 million over the next few years. We would like to point out that our second quarter disruption was higher than expected at the Lexington Hotel. Specifically, the hotel was closed for 6 days as a result of an unforecasted power interruption. This increased the number of rooms out of service, resulting in an increase to third quarter disruption. The cost of power restoration and the resultant business interruption is expected to be covered by insurance. The estimated incremental disruption for the year is $2 million to $3 million. Our other significant renovation projects include the $12 million renovations of our 2 Manhattan Courtyards. As we discussed last call, we added 5 new guestrooms at the Courtyard Midtown East for a cost of less than $1 million. These new keys were completed and put in service last month and are estimated to add approximately $2.5 million to the hotel's net asset value. At both hotels, we are experiencing positive customer reaction from the renovations. The company has several other less disruptive renovations scheduled to start later this year. The planning for the Westin Washington D.C is on schedule. The model room and lobby design are complete and look great. We believe that this $16.5 million renovation will transform the hotel and allow it to attract higher-rated transient and incremental group business. This should allow the hotel to recover and exceed its lost market share. The reaction from meeting planners to the renovation has been very encouraging, and booking pace in 2014 is up over 35%. The renovation will commence in late October and be completed during the seasonally slow winter to minimize disruption. The Westin San Diego renovation planning is progressing well. We believe this $14.5 million renovation will improve the positioning of the hotel and allow it to substantially close the rate gap with the most comparable Westin Hotel in the market. Similar to the Westin D.C., this renovation will start in the fourth quarter and be completed over the winter months to minimize disruption. Finally, we are planning the smaller renovations of our Hiltons in Boston, Burlington and Minneapolis this winter. Due to the timing of these renovations during seasonally slow periods, we don't expect significant renovation disruption from any of these projects. As we look ahead, we have great conviction that our 2013 capital investments will lead to our outperformance in 2014 and beyond. Lastly, I would like to touch on our balance sheet and capital allocation. We believe that DiamondRock has among the best balance sheet of any lodging REIT. Since our formation in 2004, the company has remained disciplined, and consistently maintained a simple and conservative balance sheet. Our debt is comprised almost exclusively of nonrecourse, non-crossed property-based debt. In addition, we maintained significant balance sheet flexibility as a result of having no outstanding borrowings on our $200 million line of credit, and keeping 13 unencumbered hotels, giving us significant future borrowing capacity. To give you an idea of how much borrowing power that provides the company, those 13 unencumbered hotels are expected to generate over $85 million of hotel adjusted EBITDA during 2013. Based on our guidance, we will end 2013 with approximately 5x net debt-to-EBITDA. Our conservative balance sheet is a key element of our strategy, and we believe it will enable DiamondRock to deliver superior shareholder returns across the lodging cycle. Finally, another benefit of our long-standing conservative stewardship of the balance sheet is a meaningful and sustainable dividend. DiamondRock reinstituted its dividend early in this recovery and has paid a dividend for 10 consecutive quarters, returning nearly $150 million to our shareholders. We believe that our commitment to providing a meaningful dividend is a distinguishing feature of our company and the cornerstone of providing strong, long-term returns to our shareholders. I'll now turn it back over to Mark to discuss our 2013 outlook and recap. Mark?

Thanks, Sean. Today, we are reaffirming our full year 2013 guidance. It is important to note that our 2013 guidance remains the same overall, but is now forecasted to be affected by 2 items. First item is that our portfolio, excluding hotels under renovation, is performing approximately $3 million ahead of our initial expectations. This outperformance is driven by stronger-than-expected group performance at the Westin Boston and Chicago Marriott, as well as outperformance from the Westin San Diego and the Salt Lake City Marriott. The second item affecting guidance is our current expectation of up to $15 million of renovation disruption during 2013. This estimate is up incrementally as a result of the recent power interruption at Lexington Hotel, and for the planned construction of 15 additional rooms at that hotel. Overall, we expect portfolio disruption to subside by the end of the third quarter, with less than $1 million of disruption projected for the fourth quarter. It will be great to get this noise behind us. For the full year 2013, we continue to expect the total portfolio to increase RevPAR, 1% to 3%. It is worth noting that excluding renovations, we expect the portfolio RevPAR to increase 4% to 6%. Moreover, the company still expects adjusted EBITDA of $195 million to $205 million, which does reflect renovation disruption, and adjusted FFO per share in the range of $0.70 to $0.74. As we look out to 2014 and beyond, we are very excited about the future of DiamondRock. We believe our portfolio, concentrated in strong gateway markets and prime resort locations, will continue to benefit from favorable lodging fundamentals. As importantly, there are also a number of specific catalysts within our portfolio. I'll mention just 5. One, the Lexington and the Manhattan Courtyard renovations will help power results in 2014. We project year-over-year EBITDA growth at these properties to collectively exceed $15 million. Moreover, the Lexington will be a multiyear growth story. Two, there is outsized growth from the balance of the renovation program. We expect above MSA growth over the next few years at hotels like the Westins in Washington, D.C. and San Diego as a result of the capital that will be invested this winter. Three, the portfolio in 2014 will enjoy a tailwind from this year's renovation disruption, and benefit from the inclusion of over 80,000 room nights being placed back into inventory. Four, group trends are strong for DiamondRock. Our portfolio enjoys a solid group booking pace for 2014, up 9.5%. And lastly, the Times Square deal next year will create value. The acquisition to Hilton Garden Inn in Times Square is being bought at a great price and will be one of our best assets. In conclusion, our team remains committed to delivering shareholder value and believes that the portfolio is really setting out well as we head into 2014. With that, we'd now like to open up the call for your questions.

[Operator Instructions] Your first question comes from the line of Jordan Sadler with KeyBanc Capital Markets.

It's Austin Wurschmidt here with Jordan. Just wanted to ask a question about group. I think you said pace is up 9.5%, which is still at a nice clip. But it was previously tracking at 12.5%, I believe. What do you think is driving the deceleration? And then also, how much of your targeted 2014 group do you have on the books?

It's Rob Tanenbaum. We currently have 52% of our 2014 groups on the books. And the decline from Q1 is understandable, given that the pace usually declines as we move towards the upcoming year. What's an interesting statistic, though, is that rate is much -- is improving. Our rate is up 1.9% -- it was up 1.9% as of last quarter, and that has increased to 5.6% as of Q2.

That's helpful. And then, just a question related to sort of your outlook. Last year, looking into the second half of the year, I think things kind of decelerated a little more than you anticipated in the back half of the year. What gives you kind of confidence in the second half that you guys are going to be able to sort of hit your guidance?

Austin, it's Mark. So for the second half of the year, obviously, we're sitting here in August, we have some visibility in the June and July results. The trends on group, I think, and the fact that we have 92% of the group already on the books for the back half of the year, feels pretty good. So we have a good history on the group and what that's going to do for the back half of the year. Although it's not as strong as the front half of the year. Business transient continues to trend well. We're looking at the July results, we're reviewing those this week. The trends continue to be very good in our markets. So between those and the leisure, I guess being the kind of third component, the trends of advanced bookings have continued to be exceptionally strong on those segments. So all the data that's there, particularly with the group backdrop, feels like it's going to be a decent back half of the year.

And your next question comes from the line of Joshua Attie with Citi.

First, just to clarify. Are the RevPAR growth numbers pro forma for the calendar change or not?

Josh, this is Sean. We adjusted our 2012 to add the months as close as we could from Marriott's calendar, but it's not apples-to-apples. So for the Marriott properties, there are 7 more days in the 2013 second quarter than there were in the 2012 second quarter.

Okay. So part of the 6.7% RevPAR growth may have been just a benefit from -- or not exactly comparable to last year?

No, because the impact on the quarter was for the -- apples-to-apples, was about 30 basis points. The 6.7% is based on available room. So that -- we feel comfortable that's a clean number.

Okay. And second, I guess I'd like to get your thoughts on the buyback and how it might be used. Historically, you've been fairly conservative and leverage is reasonable today, but it's not low and you're going to have to draw on your line to fund the Hilton Garden Inn Times Square next year. So I guess, against that backdrop, how should we think about where the buyback fits in, and as asset sale proceeds potentially come in, do you think about that as going to fund the buyback or going to reduce your future line borrowings?

Josh, it's Mark. That's a great question. So just to give you a little bit on the Board's perspective on the share repurchase program. They've obviously been watching the stock closely. They're well versed in what we believe is our net asset value and the discount that we're at. And they've also been watching the dislocation in the market, so not only is it our balance sheet but the stock, if you look year-to-date, has swung between the high and low, probably about 15%. And actually, we had a 2-day period in June where the stock dropped to 8%, not based on company moves but just based on market moves. So although not a core tenet of our strategy, the board wants to be prepared to be opportunistic for market dislocations to take advantage of that. On the balance sheet, your question about leveraging up, we're also looking at potential other refinancings of existing hotels which may also fund the Home Garden Inn transaction next year. There are some dispositions that we're reviewing that would obviously allow us to buy back stock, without increasing our debt, but all of it is going to be dependent on our assessment of net asset value and the opportunity that's in the market. I don't think you should expect that when we get together next quarter that we've spent $100 million on share repurchase. We're going to be very judicious about how we use the plan. And there's a constant dialogue between management and the board about setting the appropriate price for the repurchase. And as things change in the marketplace, and things change with companies, such as dispositions or capital requirements for projects, we'll continue to try to make the best decision to make create shareholder value.

Do you feel like you would need to sell an asset to buy back stock? Or would you feel comfortable if the stock were at a level you thought was attractive, use the existing capacity of the company to buy back stock?

At a certain level, we would be comfortable using the existing capacity of the company.

Your next question comes from the line of Chris Woronka with Deutsche Bank.

Can I ask a question about how you kind of view New York, structurally, from a long-term impact in your portfolio? I mean, when you get the Garden Inn open and you get Lexington done, I mean, New York is going to be a very significant part of your portfolio, I guess, more so than it's ever been. Are you -- it's obviously a great market but, I mean, are you comfortable with where it's going to be or you bought the Courtyards really well, many years ago, I mean, is there any thought to maybe recycling those at some point?

Chris, this is Mark. So let me take those in kind of 2 parts. The first, our perspective on New York. We're bullish, long-term, on New York. There's obviously a lot of supply coming into market, there's supply coming into market. If you look, since 2009, there's been about 6 million available room nights added to the marketplace, but that was overwhelmed by the increase of demand, which was probably up about 7 million room nights during that same period. So the market's done a terrific job, with demand growth, of absorbing the supply. We do think that you need to be very watchful of supplies, particularly next year and the following year, it's going to continue to creep up. And you're going to have to be very thoughtful about how you manage your sales strategy to adjust for that. The East Side seems to be the least impacted area of Manhattan with supply. So that has some of the lowest supply growth rates in the island. I think it's about 2.6% this year and a little over 1% for next year. So we feel good about the East Side, where the majority of our representation is. The Hilton Garden Inn Times Square, I think the -- although there is supply from Times Square, that's a very deep market, so we're not concerned about the supply in Times Square. As far as recycling assets, which was the other question, it is something we consider. Our exposure as a company to New York is about 18% right now. It will take over -- a little over 20% when we get the Hilton Garden Inn, so we will have significant representation. The other avenue, obviously, is if we do get back in the acquisition game, probably, our asset allocation will be in other markets and just mathematically, representation to New York would decline.

Okay, that's helpful. And then, on the Lexington Hotel, how do you view the cost structure there relative to, maybe, other full-service hotels, maybe ones that might be operated by Marriott? Do you think there's a -- with Highgate in there, is that going to be a competitor -- a really good advantage for you guys?

We feel very comfortable with Highgate in that role. Their history as an operator is very strong, and we think the plan in place, both from a cost side and a revenue generation perspective in their marketing plan on a go forward basis, is extremely compelling.

And Chris, this is Sean. The other aspect of that hotel that makes it compelling is that the F&B operations, which tend to hurt full-service hotel margins, are outsourced at that hotel, which allows it to be a primarily rooms-only hotel, which allows for much higher margins than you would expect from a traditional full-service hotel. And that was one of the key catalysts to our buying the hotel in the first place.

Okay, great. And then, just finally, on the Chicago property tax, as you mentioned, are you guys appealing those? And maybe just a quick review of the portfolio, how you're looking on taxes, and if there's any significant increases we should be thinking about.

Chris, the Chicago property tax was not an assessment issue as much as the rates in Cook County increased unexpectedly this quarter. So this actually impacts anybody that owns property in Chicago. So that was a little bit of a surprise although, on historical standards, the property taxes are still pretty well below where they were during the 2007 time frame. We've had positive surprises in Chicago property taxes for the last number of years. On the balance of portfolio, we have about 18 hotels under appeal right now. There's clearly lumpiness in when that gets recorded in the P&L because you don't record the gain until you win the appeal. So there's some potential benefits long-term within the portfolio there. I think from a run rate, I think anywhere from 3% to 5% is what I would underwrite long-term for property tax increases across the portfolio.

Your next question comes from the line of Wes Golladay with RBC Capital Markets.

It looks like you guys found some nice opportunities by adding rooms. I wonder if you found any additional revenue opportunities or maybe some cost reductions throughout the portfolio?

Wes, it's Rob Tanenbaum. We found -- we're looking at an additional opportunity at the Boston Hilton, where we think we can add more than 20 additional keys, so we're currently studying that opportunity. But we've been successful in our CapEx program. We've added ahead of CapEx to our team, and we had over $2.2 million of CapEx assigned for the 3 hotels, I think in Boston, Burlington and D.C. We -- as identified, and we were able to save 85% of that cost through addressing various issues. So for example, there was a roof replacement at the Boston Hilton, it was $675,000 that we were able to address by repairing the roof for $119,000 and getting a 10-year warranty on it. So we're looking at things in a very different perspective, and we've been able to achieve quite a bit of cost savings. In Sonoma, we've recently instituted a resort fee that will drive an incremental $300,000 to the hotel's bottom line. We're also studying the opportunity of creating another 6,500 square feet of meeting space at the Boston Westin and that -- it's currently under consideration as retail space, but we believe there's a higher and better use as meeting space. We're also looking at leasing out 2 of our restaurants at 2 of our hotels. And we're also really making a significant change in our leadership of the hotels. Since April 1, we've replaced 9 GMs, both through natural and forced moves. We've also replaced 2 directors of revenue management, director of sales, director of food and beverage and a director of finance. And lastly...and lastly, just bringing in telephone -- bringing in consultants to help us out at both in the telephone, labor analysis and food and beverage to help us out. Specifically, I'll just give you a quick example. In telephone, in San Diego for example, we brought a telephone consultant in to take a look at opportunities there. We found $55,000 in annualized savings. It was $125,000 in CapEx available to us. We then -- we since have hired the telephone consultant to look at the entire portfolio.

Okay. So where would you say you are at in the process of mining the portfolio that -- you've gotten halfway done or you have looked through most of it at this point?

No, we're in the beginning stages of mining the portfolio.

Okay. And I guess, a question for Sean. You mentioned the possibility of getting more secured debt. Where do you think you can borrow 10-year money today?

10-year money is about 5% is what I would expect to borrow today. The 10-year swap rate is blown out, just call it, 70 basis points from when we last borrowed and spreads are out the balance, the remaining 30 basis points. So I think that would be a market clearing price today.

Okay. And looking out next year, you mentioned some ADR gains on the group side, is this dominated by 1 market such as Boston or is it more broad-based?

Boston is our strongest group market next year, although, we have strong group pace at, say, San Diego and Washington, D.C. as well. But Boston is a primary group market for us and we expect it to be a terrific year next year in Boston on the group front.

Your next question comes from the line of David Loeb with Baird. David Loeb - Robert W. Baird & Co. Incorporated, Research Division: Mark, you alluded to the value of the Hilton Garden Inn being well in excess to the $450,000 per room contract price. What do you think the value of that will be at opening?

David, we're talking about the next -- middle of next year, but we would estimate based on the pro forma that we're looking at, if we hit the dollar underwriting, it's probably worth about $550,000 a key. David Loeb - Robert W. Baird & Co. Incorporated, Research Division: $550,000. Okay. And you have a lot of renovation plans that wind up early 2014. I'm assuming that's, essentially, the end of the first quarter or maybe the beginning of the second quarter. Is there much beyond that? Will you be doing much in the way of major renovations beyond that window?

No, we don't have -- currently, we don't have any plans to do any new renovations for 2014, other than the ones that we've already identified. And they do wrap-up, generally, around the end of the first quarter. David Loeb - Robert W. Baird & Co. Incorporated, Research Division: And your results were really good. You, unlike a lot of your peers, you didn't say anything about weaker demand in the second quarter impact of the sequester. Did you see any of that in your markets? Did you just find ways to replace that without it affecting occupancy rates? What do you think is going on?

Rob, you want to take that?

Absolutely. We saw a 1% decrease in our government business for the portfolio, and government only represents about 3% of our overall demand. It seems we've been able to replace -- interestingly enough, I'll give you an example, in Minneapolis, where there was a group cancellation, we're able to replace it with a higher-end special corporate business transient demand. So again, the hotels have done, overall, a great job replacing demand and infusing -- for example, in Denver as well, where there were some city-wide compression, pushing rates and really, being able to maximize the opportunities. David Loeb - Robert W. Baird & Co. Incorporated, Research Division: Great. That's impressive. And then, finally, Frenchman's Reef. I guess we're, in this past quarter, we're entering the second year post-renovation, am I remembering the timing right?

That's right. David Loeb - Robert W. Baird & Co. Incorporated, Research Division: Were you hoping for more of a, kind of, a continued ramp there? What do you think of its performance?

Yes, I think, so David, when we look at that hotel, we're seeing -- and I'll let Rob jump in here in a minute because his impression means he's got a great playbook from Aruba Marriott, which he previously asset-managed. But our return -- the revenues have been actually very strong and are ahead of our pro forma projections when we did the $45 million investment. What we believe is there's still a lot of expense that we can get out of the hotel, and that's really what's going to be able to drive, what we think will be a very strong growth year next year. But I'll let Rob talk about his game plan, because I think it's fairly interesting.

Dave, it's Rob. I'm really thrilled about this hotel, again, having worked at the Aruba Marriott as it has a direct correlation with -- between the 2 properties and what we're putting forth here. For example, we brought back revenue management. Revenue management was in New Jersey. We're bringing that back on property. We have a new GM that just started this past week, that we are thrilled about. And we're changing out additional management positions at the hotel. We believe this -- we have an opportunity to drive -- to drive demand via additional e-channels and we're focusing on the KPIs of this asset. So we see a lot of upside as we go forward on this property.

David, I would just add. If Rob was able to use his playbook he used at Aruba and effectively put that in here, we have every reason to believe -- and we will be able to do that, we'd expect this to have significant upside in 2014 and 2015, as Rob implements, kind of, a different -- a little different revenue management strategy, but particularly focused on expense controls and getting that, really, to best-in-class margins for that property.

And your next question comes from the line of Lukas Hartwich with Green Street Advisors.

I'm just trying to clarify the performance at your Chicago Marriott. RevPAR was up 12% during the quarter but margins were down 120 bps. Is that all taxes or what was the explanation for that?

Yes, Lukas, this is Sean. It was all taxes. We actually had strong house profit flow at the Chicago Marriott, particularly this quarter, which was driven by the group business. So it was a pretty significant property tax adjustment.

[Operator Instructions] Your next question comes from the line of Nikhil Bhalla with FBR. Nikhil Bhalla - FBR Capital Markets & Co., Research Division: Mark, just a question for you. For 2014, just given all the renovations you've done in the portfolio here, all things being equal, how much do you expect your portfolio to outperform the market next year? From a growth perspective.

Right. I mean, if you just put the 80,000 room nights back in, that's probably 2 points of occupancy. So certainly, we would expect to beat -- if you kind of took our MSAs and market growth, we'd anticipate beating that by at least 2 points in occupancy. Then, we expect significant rate upside from hotels like the Lexington, as well as comps and ROIs, essentially, from a number of other projects that we're pursuing right now. We're not giving guidance for '14 but we would expect to, certainly, significantly outpace the MSAs that we're in overall. Nikhil Bhalla - FBR Capital Markets & Co., Research Division: Okay. And just a follow-up question on the share buyback program. When you review the share buyback with the board, how much of this is -- to kind of put some kind of a floor on the stock versus having a plan to buy back sequential, like, a little bit of amount every single quarter? I mean, how do you think about that?

Yes, the board's perspective is it shouldn't be gimmicky. It's not really to put a floor on the stock price. It's really to take advantage of what we think could be a great value-creation opportunity and take advantage of market dislocation. So what they're focused on is really looking at the NAV of the company, looking at the opportunity for market dislocation and then, balancing that with what's going on with our balance sheet and competitive uses of the capital. But that's really -- it's a tool in our value-creation tool chest, and that's the way they look at it.

Your next question is a follow-up from the line of Joshua Attie with Citi.

I just want to follow up on dispositions. And I know you don't like to talk about specific deals before they close. But can you kind of tell us, are you in the market with assets today?

Josh, this is Mark. Yes, we are looking at a couple of select opportunities. We are talking to potential bidders on those assets. But besides that, I don't have much color to add at this point.

And what, kind of -- what have those discussions been like? Has there been volatility in the bid ask, with the move-up in long-term treasury bonds or not?

Right. So the assets that we're looking at possibly monetizing are more assets where people think that they can, perhaps, change the operator and run the hotel differently. They may have a different mousetrap, where they think they can do it differently. We haven't heard any feedback from these parties about changing pricing guidance based on differences in financing. So we haven't gotten that feedback. I think the market's relatively strong for opportunities where people can change brand and management. So that market seems to be very robust. Clearly, the market that is more of a steady Eddie asset, where it's really more financing play as much as it is hotel deal. Those, you would expect to be more influenced, but we are looking at monetizing one of those kind of assets and we haven't heard any feedback from bidders that they are priced or potential bids are impacted by the change in rates yet.

Your next question comes from the line of Rich Hightower with ISI Group.

Just a quick follow-up on the buyback authorization. Obviously, this is something we've kind of discussed in the past and the -- that particular tool in the toolkit has existed all along. And I'm just curious, for a little more color, as to maybe what changed in the board's thinking this quarter versus prior quarters? And just how you came to the conclusion, at this particular time, that this is the right -- a right tool to potentially use in the toolkit, so to speak?

Right. This is Mark, I'll just give you a little bit of a color. I think it's really the -- we've been talking about it every quarter, obviously, as a potential vehicle. We wanted to put it in place with the earnings call, so that's the right course I think to put the program in. They've really been struck by the volatility in the stock and I think the continued trading at a discount to NAV. So it's been an ongoing dialogue. I don't think that there was any one thing that triggered putting it in this quarter versus last quarter. I think it's more of the evolution of the conversation and particularly, some of the market dislocation, like June, where the stock dropped 8% in 2 days, not based on anything at the company. I think that kind of dislocation and that kind of volatility in the stock really warranted close focus from the board to put a plan in place.

Okay, and I apologize if I missed it earlier, but do you have maybe a loose threshold below which, if you're comparing the stock price to NAV below which, you really feel compelled to pull the trigger on executing on the buyback program? Or is it just take it as it comes?

Well, it's an ongoing discussion where we're evaluating the -- we obviously have a view on our NAV but it's ongoing dialogue with the board about setting the right price parameters around the repurchase.

And with no further questions at this time, I would now like to turn the conference over to Mark Brugger for closing remarks.

Thank you, Tawanda. To everyone in this call, we appreciate your continued interest in DiamondRock, and look forward to updating you next quarter. Also, I'd like to remind our listeners that the company has scheduled an Investor and Analyst Day on September 10 in New York City, where we'll offer tours to some of our renovated hotels and hopefully, showcase the upside potential. We look forward to seeing you there. Thank you. Have a great day.

Thank you for joining today's conference. That concludes the presentation. You may now disconnect, and have a great day.